
IREBS
Prof. Dr. Tobias Just, IREBS International Real Estate Business School
Germany’s housing market is facing a severe mismatch between supply and demand, compounded by declining building permits and surging costs. According to recent data, the number of new housing starts dropped by 15% last year, revealing the depth of the sector’s current difficulties.
In a recent article for the Frankfurter Allgemeine Zeitung (FAZ), Professor Dr. Tobias Just of the IREBS International Real Estate Business School offered his thoughts on the outlook for 2025 and advised against waiting too long for interest rates to drop further. Just's article offered little immediate encouragement for optimists, it has to be said.
The rental price brake, introduced to curb rapidly rising rents in high-demand areas, continues to draw criticism as a cornerstone of German housing policy. According to Professor Just, while it may provide temporary relief, it has failed to address the core issue: insufficient housing supply. “The brake can only buy time, but that time must be used to build more,” he stresses.
However, whether this time is being effectively used remains an open question. With the current pace of construction and regulatory delays, it seems unlikely that enough new housing units will come online quickly enough to meet demand. If the brake expires without corresponding increases in housing supply, landlords may raise rents again, particularly in cities like Berlin, further stressing low-income households. The situation is exacerbated by additional cost drivers such as property tax reforms and CO2 levies, making rent increases almost inevitable.
"Take advantage of current low rates while they last"
For buyers, affordability remains a pressing concern. Interest rates, although stabilising, are unlikely to drop significantly due to global inflationary risks. “Take advantage of the current low rates while they last,” Just advises, warning that waiting for further reductions could backfire. The market has already priced in potential European Central Bank cuts, but external factors, such as US tariff policies, could disrupt this outlook. Borrowers refinancing expiring fixed-rate loans are likely to face higher costs, adding strain to household budgets. This issue is widespread, with many families nearing the end of their fixed-rate periods, especially those who locked in lower rates during the past decade.
The housing market also shows a stark divide between energy-efficient properties and those with poor ratings. “New or renovated properties with high energy efficiency are seeing price stability or even appreciation,” Just notes. Conversely, homes with low energy ratings remain discounted, though they offer opportunities for buyers willing to invest in renovations. Just highlights the environmental potential of upgrading these properties, stressing the importance of due diligence and financial planning before purchase. For example, buyers often encounter unexpected issues such as outdated wiring or structural inefficiencies, which can escalate renovation costs significantly if not identified early.
More trouble ahead for project developers
Developers, too, are grappling with higher interest rates and financing challenges. Insolvencies among property developers could further delay projects, exacerbating housing shortages. Just calls for streamlined and harmonised building regulations across federal states to cut costs and simplify processes. The lack of uniform standards for energy efficiency retrofits often leads to delays and inflated costs, deterring developers and buyers alike. He suggests innovative solutions, such as building upward with timber or redeveloping industrial sites, to create affordable housing quickly. However, he warns that local resistance to densification—the “Not in My Backyard” mentality—remains a significant barrier to progress.
Despite declining building permits and completions, Just sees some positive movement in the market. Transaction volumes are expected to rise as rental yields become more aligned with interest rates. Owners unable to finance their properties may be forced to sell, creating opportunities for buyers. Unrenovated properties, once overlooked, could become increasingly attractive as demand for affordable options rises and banks favour projects with clear renovation plans.
Professor Just’s message is clear: the housing market requires bold, pragmatic action. "The time for half-measures has passed; we need swift and decisive reforms to address these systemic issues," he emphasises. Speed of implementation, not perfection, is essential to addressing Germany’s growing housing crisis. Without decisive measures, both renters and buyers will continue to bear the brunt of an increasingly constrained market. This is a critical moment for policymakers to act. If they fail to do so, the long-term consequences could be dire for the German housing market.